Assessing the Impact of G7 COVID-19 Fiscal Responses

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10 December 2021, 8:15 a.m.

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The COVID-19 pandemic compelled governments to implement extraordinary fiscal measures to support their economies. In Canada, as in other Group of Seven (G7) countries, these measures took the form of a mix of direct support measures (e.g., the Canada Emergency Wage Subsidy and Canada Emergency Response Benefit), tax liquidity support (e.g., income tax, sales tax, remittance and customs duty payment deferrals), and other liquidity support and capital relief (e.g., the Business Credit Availability Program). This HillNote examines the fiscal approaches taken by G7 countries during the pandemic and assesses how their real gross domestic product (GDP) and employment were affected. However, it does not examine the impact of G7 central banks’ COVID-19 monetary responses, which also had an indirect impact on these two economic variables.

G7 COVID-19 Fiscal Responses

According to the Government of Canada, additional spending in response to the COVID-19 pandemic on programs and direct support measures amounted to $349.8 billion, tax liquidity support totalled $85.1 billion and other liquidity support for businesses was $81.9 billion. The total cost of the federal government’s response to the pandemic stood at $516.7 billion as of 31 July 2021.

Among G7 countries, two contrasting fiscal approaches to dealing with the pandemic emerged. One approach was to focus primarily on additional spending and foregone revenue for individuals and businesses (i.e., a combination of direct support measures and tax relief). The other approach was to prioritize equity, loans and guarantees for businesses (i.e., liquidity support and capital relief).

From January 2020 to September 2021, the United States (U.S.), the United Kingdom (U.K.) and Canada provided more support in the form of additional spending and foregone revenue than they did in the form of equity, loans and guarantees. For their part, Italy, Japan, Germany and France provided more support in the form of equity, loans and guarantees than they did in the form of additional spending and foregone revenue.

According to the International Monetary Fund, the three G7 countries that provided the highest levels of support in the form of additional spending and foregone revenue as a percentage of their 2020 GDP were the U.S. (25.5%), the U.K. (19.3%) and Japan (16.7%). The three countries that provided the highest levels of support in the form of equity, loans and guarantees as a percentage of their 2020 GDP were Italy (35.3%), Japan (28.3%) and Germany (27.8%). Figure 1 presents the G7 countries’ COVID-19 fiscal responses as a percentage of their 2020 GDP from January 2020 to September 2021.

Figure 1 – G7 COVID-19 Fiscal Responses, January 2020 to September 2021
(percentage of gross domestic product)

This figure shows the COVID-19-related fiscal measures implemented by each G7 country from January 2020 to September 2021 as a percentage of their 2020 gross domestic product (GDP). Two categories of measure are shown for each country: additional spending and foregone revenue, and equity, loans and guarantees. Measures related to additional spending and foregone revenue, as a percentage of that country’s 2020 GDP amounted to 9.6% for France, 10.9% for Italy, 15.3% for Germany, 15.9% for Canada, 16.7% for Japan, 19.3% for the United Kingdom and 25.5% for the United States. Measures related to equity, loans and guarantees as a percentage of that country’s 2020 GDP totalled 2.4% for the United States, 4.0% for Canada, 15.2% for France, 16.7% for the United Kingdom, 27.8% for Germany, 28.3% for Japan and 35.3% for Italy.

Note: The standard reference year for gross domestic product is 2020.
Source: Figure prepared by the Library of Parliament based on data obtained from the International Monetary Fund, Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic, October 2021.

Evolution of Real Gross Domestic Product in G7 Countries

The onset of the COVID-19 pandemic caused real GDP to decrease in all G7 countries up until the second quarter of 2020. According to the Organisation for Economic Co-operation and Development (OECD), Canada’s real GDP decreased by 13.1% between the fourth quarter of 2019 and the second quarter of 2020. Over the same period, the smallest decrease in real GDP among G7 countries occurred in Japan (8.4%), while the biggest decline in real GDP occurred in the U.K. (21.7%).

By the third quarter of 2021, the real GDP of the U.S. exceeded its pre-pandemic levels of the fourth quarter of 2019 by 1.4%, while France’s real GDP had almost returned to its pre-pandemic level. As for Japan, the U.K., Canada, Italy and Germany, their real GDP in the third quarter of 2021 remained below the levels of the fourth quarter of 2019 by 2.2%, 2.1%, 1.5%, 1.4% and 1.1%, respectively. The OECD projects that it will take until the second quarter of 2022 before the real GDP of all G7 countries exceeds pre-pandemic levels. Figure 2 presents the real GDP index of G7 countries from the fourth quarter of 2019 to the fourth quarter of 2022.

Figure 2 – Evolution of Real Gross Domestic Product in G7 Countries,
Fourth Quarter 2019 to Fourth Quarter 2022 (Index, Q4 2019 = 0%)

This figure shows the evolution of real gross domestic product (GDP) in G7 countries from the fourth quarter of 2019 to the fourth quarter of 2022. The most severe contraction in real GDP for all G7 countries occurred in the second quarter of 2020 as compared to the fourth quarter of 2019. The decrease was 8.4% in Japan, 10.1% in the United States, 11.6% in Germany, 13.1% in Canada, 18.0% in Italy, 18.4% in France and 21.7% in the United Kingdom. In the third quarter of 2021, real GDP in the United States was higher by 1.4% as compared to levels in the fourth quarter of 2019, while real GDP in France was just below its pre-pandemic level. As for Japan, the United Kingdom, Canada, Italy and Germany, real GDP in the third quarter of 2021 remained below the levels set in the fourth quarter of 2019 by 2.2%, 2.1%, 1.5%, 1.4% and 1.1%, respectively. It is projected to take until the second quarter of 2022 for all G7 countries to exceed their levels of real GDP set in the fourth quarter of 2019.

Note: Real gross domestic product is measured in terms of volume in U.S. dollars and at constant purchasing power parities. Purchasing power parities are the rates of currency conversion that try to equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. The standard reference year is 2015. Quarters denoted with asterisks are projections.
Source: Figure prepared by the Library of Parliament using data obtained from the Organisation for Economic Co-operation and Development, “Economic Outlook No. 110 – December 2021,”  OECD.Stat, Database, accessed 1 December 2021.

Evolution of Employment in G7 Countries

Between the fourth quarter of 2019 and the second quarter of 2020, employment in Canada and the U.S. decreased by 12.6% and 13.2%, respectively. Over the same period, Italy, France, Japan, Germany and the U.K. experienced less severe employment reductions of 3.3%, 1.7%, 1.7%, 1.2% and 1.0%, respectively. The OECD forecasts for the fourth quarter of 2022 that France, Canada and Italy will equal or exceed their employment levels of the fourth quarter of 2019 by 2.7%, 2.3% and 0.0%, respectively. However, the employment levels of the U.S., Japan, Germany and the U.K. for the fourth quarter of 2022 are projected to be below the levels of the fourth quarter of 2019 by 0.6%, 0.6%, 0.3% and 0.3%, respectively. Figure 3 presents the employment index in G7 countries from the fourth quarter of 2019 to the fourth quarter of 2022.

Figure 3 – Evolution of Employment in G7 Countries,
Fourth Quarter 2019 to Fourth Quarter 2022, (Index, Q4 2019 = 0%)

This figure shows the evolution of employment in G7 countries from the fourth quarter of 2019 to the fourth quarter of 2022. Relative to the fourth quarter of 2019, Canada and the United States saw decreases in employment of 12.6% and 13.2%, respectively, in the second quarter of 2020. However, Italy, France, Japan, Germany and the United Kingdom experienced more moderate decreases of 3.3%, 1.7%, 1.7%, 1.2% and 1.0%, respectively, between the fourth quarter of 2019 and the second quarter of 2020. It is projected that, by the fourth quarter of 2022, France, Canada and Italy will exceed or equal their levels of employment set in the fourth quarter of 2019 by 2.7%, 2.3% and 0.0%, respectively. However, employment levels in the fourth quarter of 2022 for Japan, the United States, Germany and the United Kingdom are projected to be below pre-pandemic levels by 0.6%, 0.6%, 0.3% and 0.3%, respectively.

Note: Quarters denoted with asterisks are projections.
Source: Figure prepared by the Library of Parliament using data obtained from the Organisation for Economic Co-operation and Development, “Economic Outlook No. 110 – December 2021,” OECD.Stat, Database, accessed 1 December 2021.

Conclusion

Regardless of their fiscal response to the pandemic, none of the G7 countries were able to completely stave off the declines in real GDP during the first half of 2020. However, by the third quarter of 2021, only the U.S. – whose fiscal response focused more on additional spending and foregone revenue than equity, loans and guarantees – had already closed its real GDP gap created by the pandemic, while France, Canada, Japan, Germany and Italy are projected to do so in the first quarter of 2022, followed by the United Kingdom in the second quarter of 2022.

Although Canada experienced the second most severe employment reduction after the U.S., it is projected to be the second G7 country – following France – to close its pandemic-related employment gap in the fourth quarter of 2021. Italy is the only other G7 country projected to close its pandemic-related employment gap in 2022.

Author: Andrew Barton, Library of Parliament



Categories: COVID-19, Economics and Finance

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